Crude Tumbles to Two-Month Low as U.S. Supply Drop Disappoints

  • U.S. supplies fell 2.22 million barrels last week, EIA reports
  • Gasoline inventories slipped while demand climbed to record

Crude Tumbles to a 2-Month Low

Oil tumbled to the lowest level in almost two months after a government report showed U.S. crude stockpiles dropped by less than expected.

Crude supplies fell 2.22 million barrels in the week ended July 1, Energy Information Administration data show. Analysts surveyed by Bloomberg had forecast the EIA would report a 2.5 million decline. The industry-funded American Petroleum Institute said in its report Wednesday that crude inventories dropped by 6.7 million barrels. The decrease accelerated after futures broke through the $45.83-a-barrel June low.

"Expectations were elevated after yesterday’s API report and when they didn’t pan out the market began to drop," said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. "We broke through key support around $46 and prices dropped further. The next area of support is $43."

Futures traded between $45 and $51 a barrel in June after almost doubling from a 12-year low in February. Although the rebound has prompted U.S. producers to begin returning drilling rigs to fields, output fell in all but one of the past 17 weeks and is 12 percent below its peak last year.

West Texas Intermediate oil for August delivery decreased $2.29, or 4.8 percent, to close at $45.14 a barrel on the New York Mercantile Exchange. It’s the lowest settlement since May 10. Prices rose as much as 1.7 percent before the release of the report at 11:00 a.m. in Washington. Total volume traded was 20 percent above the 100-day average at 2:50 a.m.

Ample Stockpiles

Brent for September settlement dropped $2.40, or 4.9 percent, to $46.40 a barrel on the London-based ICE Futures Europe exchange. It’s also the lowest close since May 10. The global benchmark crude ended the session at a 56-cent premium to WTI for the same month.

Prices also declined as the dollar rebounded, curbing investor demand for raw materials denominated in the greenback. The Bloomberg Dollar Index, which tracks the currency against major peers, rose 0.2 percent, while the Bloomberg Commodity Index, a gauge of 22 raw materials, decreased 2.3 percent to the lowest since May 31.

U.S. crude inventories dropped to 524.4 million barrels, the lowest since March 11, EIA data show. Supplies climbed to an 87-year high of 543.4 million barrels in the last week of April.

Crude production in the U.S. tumbled by 194,000 barrels a day to 8.43 million last week, the EIA report showed. The number of active oil rigs in the U.S. rose by 11 to 341 last week, Baker Hughes Inc. data show. Explorers have idled more than 1,000 oil rigs since the start of last year.

Crude imports climbed 11 percent to 8.36 million barrels a day last week. Arrivals have averaged 7.82 million barrels a day this year.

"If it weren’t for stubbornly high imports, we would be chewing through the supply overhang," said Matt Sallee, who helps manage $14.1 billion in oil-related assets at Tortoise Capital Advisors in Leawood, Kansas. 

Refineries reduced operating rates by 0.5 percentage point to 92.5 percent of capacity last week, EIA data show. U.S. refiners typically maximize gasoline output now to meet demand during the summer peak driving season.

Gasoline stockpiles along the East Coast, known as PADD 1, slipped 613,000 barrels to 71.9 million, down from the prior week’s record 72.5 million. Nationwide supplies slipped 122,000 barrels to 238.9 millions.

Very Bearish

"Just about everything points to lower prices," said Stephen Schork, president of the Schork Group Inc., a consulting company in Villanova, Pennsylvania. "At this time of year it’s all about gasoline, not crude, and supplies remain close to record highs even though demand is very strong. This is very bearish."

U.S. gasoline demand averaged 9.76 million barrels a day in the four weeks ended July 1, the highest in EIA data going back to 2000.

Gasoline futures for August delivery dropped 4.9 percent to $1.3631 a gallon., the lowest close since March 3.

"We’re two-months away from Labor Day and with it the end of the driving season," Schork said. "Demand is at a record high and yet there’s no discernible impact on supply. The market is going to be in bad shape once the driving season ends."

Oil-market news:

  • Nigerian oil workers began a strike at midnight that will be gradually implemented over a three-day period, the Pengassan union said.
  • Royal Dutch Shell Plc lifted force majeure on shipments of Bonny Light crude in Nigeria.
  • Libya will start exporting oil in a week from Ras Lanuf and Es Sider, two of the country’s biggest ports, according to Ibrahim al-Jedran, commander of Libya’s oil guards in the middle region.
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